Considered and decided by Toussaint, Chief Judge, Randall, Judge, and Harten, Judge.

S Y L L A B U S

An
insured’s tender of the defense of a claim is a condition precedent to
compelling arbitration under an intercompany arbitration agreement.

O
P I N I O N

TOUSSAINT, Chief
Judge

Respondent
insurance company refused to arbitrate a car accident because its insured
instructed it not to provide coverage, pay or defend the action. Appellant insurance company moved to compel
arbitration, and the district court denied the motion. Appellant contends that (1) the district
court erred by denying its motion to compel respondent to arbitrate; (2)
respondent’s refusal to pay the claim based on the instruction of the insured
violates public policy and the Unfair Claims Practices Act, Minn. Stat.
§ 72A.201, subd. 8(3) (2000); (3) appellant is entitled to attorney fees under
the arbitration agreement; and (4) the proceedings in the underlying action
against respondent’s insured should be stayed pending conclusion of
arbitration. We affirm.

FACTS

This case arises out of a motor-vehicle
accident. Glen Meyer hired Michelle Miller’s
husband, Loren, to plow his driveway.
As Loren was plowing Meyer’s driveway, Michelle drove in the driveway to
speak to Loren. At about the same time,
Meyer backed out of his garage, drove forward around his rock garden, and then,
while looking at and waving to Loren, collided with Michelle’s vehicle.

At the
time of the accident, the Millers were insured by appellant State Farm Mutual
Insurance Company (State Farm). State
Farm paid for the property damage to Michelle’s vehicle, but Michelle also
sustained out-of-pocket expenses as a result of the policy’s $500
deductible. State Farm attempted to
recover from Meyer, the amounts it had paid to Michelle and Michelle’s
out-of-pocket expenses. When Meyer
refused to disclose the identity of his insurer, State Farm and Michelle sued
him. State Farm later learned that
Meyer was insured by respondent Cincinnati Insurance Company (Cincinnati), but
Meyer had instructed Cincinnati not to provide coverage, pay the claim, or
defend him. Cincinnati “stood ready to
defend and indemnify” Meyer, but Meyer elected not to invoke his liability
coverage and instead decided to defend the matter himself.

State
Farm filed a petition for arbitration pursuant to its intercompany arbitration
agreement with Cincinnati. While
Cincinnati admitted that it was a signatory to the agreement it argued that the
agreement only takes effect if Cincinnati’s insured invokes coverage.

State Farm moved to compel Cincinnati to arbitrate. The district court denied State Farm’s motion,
concluding that (1) the disputed claim does not fall within the scope of the
arbitration agreement; (2) Cincinnati is under no obligation to defend,
indemnify, or arbitrate on its insured’s behalf because its insured had not
tendered defense of the claim to it; (3) the insurance policy between
Cincinnati and its insured did not confer third-party-beneficiary status on
State Farm; and (4) the Minnesota Unfair Claims Practices Act does not affect
State Farm’s claim. State Farm
appeals.

ISSUES

I.Did
the district court err by denying appellant’s motion to compel arbitration?

II.Did
respondent’s refusal to pay the claim based on the instruction of its insured
violate public policy and the Unfair Claims Practices Act, Minn. Stat. §
72A.201, subd. 8(3) (2000)?

III.Did
the district court err by denying appellant’s request for attorney fees under
the terms of the parties’ intercompany arbitration agreement?

IV.Did
the district court err by denying appellant’s motion to stay the underlying
proceeding between appellant’s insured and respondent’s insured?

State Farm argues that the district court erred by
denying its motion to compel Cincinnati to arbitrate. The parties do not dispute that a valid arbitration agreement
exists. We are asked to determine
whether the dispute falls within the scope of the arbitration agreement. See id. “Whether or not a party has agreed to arbitrate a particular
dispute is a matter of contract interpretation, which this court reviews de
novo.” Stiglich Constr., Inc. v. Larson, 621 N.W.2d 801, 802 (Minn. App.
2001) (citation omitted), review denied (Minn. Mar. 27, 2001).

State Farm and Cincinnati are parties to an
intercompany automobile-insurance arbitration agreement. The agreement requires arbitration of “any
questions or disputes which may arise from any automobile physical damage
subrogation or property damage claim not in excess of $100,000.” The parties concede that this is such a
claim. But the agreement expressly does
not apply and arbitration is not required as to claims against which a company
asserts a defense of lack of coverage on grounds other than delayed notice, no
notice, or noncooperation.

Cincinnati argues that the agreement does not apply
to the present claim because its insured never tendered to it the defense of
the claim, and thus, Cincinnati’s duty to defend and indemnify its insured
never materialized. We agree with
Cincinnati. “[T]ender of defense is a
condition precedent to the creation of an obligation to indemnify.” Seifert v. Regents of Univ. of Minn.,
505 N.W.2d 83, 87 (Minn. App. 1993), review denied (Minn. Oct. 28,
1993). Likewise, the “tender of defense
is a condition precedent to the duty to defend.” Pedro Cos. v. Sentry Ins., 518 N.W.2d 49, 51 (Minn.
App. 1994). To constitute tender of
defense, the insurer must have “knowledge that the suit is potentially within
the policy's coverage coupled with knowledge that the insurer's assistance is
desired.” Home Ins. Co. v. Nat’l
Union Fire Ins. of Pittsburgh, Pennsylvania, 643 N.W.2d 307,
320 (Minn. App. 2002) (quotation omitted).

State Farm attempts to bring
the dispute under the terms of the parties’ arbitration agreement by arguing
that Meyer’s failure to tender defense of the claim to Cincinnati amounts to
noncooperation. The duty of the insured
to cooperate with its insurer, however, arises after a tender of defense.

State Farm also asserts that the district court
erred by concluding it was not a third-party beneficiary of the arbitration
agreement signed by Cincinnati. Even if
State Farm were to establish that it was a beneficiary to the arbitration
agreement, the condition precedent required for the arbitration agreement to
take effect, a tender of defense, still has not occurred.

Because Meyer has not tendered the defense to
Cincinnati, the district court did not err by denying State Farm’s motion to
compel arbitration.

Unfair
Claims Practices Act

State Farm argues that Cincinnati’s refusal to pay the claim based on the
instruction of the insured violates public policy and Minnesota’s Unfair Claims
Practices Act, Minn. Stat. § 72A.201, subd. 8(3) (2000). We disagree.

The act defines various acts by an insurer that constitute unfair
settlement practices, including “denying a liability claim because the insured
has requested that the claim be denied.”
Id. But the act provides
for administrative enforcement and does not create a private cause of
action. Morris v. American Family
Mut. Ins. Co., 386 N.W.2d 233, 235 (Minn. 1986). Even if the act had some impact on State Farm’s private claim
against Cincinnati, which it does not, Cincinnati’s actions do not constitute
an unfair practice. Although Meyer
instructed Cincinnati not to pay the claim, tendering of the defense was a
condition precedent to this provision taking effect. In other words, Meyer’s actions could not constitute “requesting
that the claim be denied” when he had not yet tendered the defense to
Cincinnati.

State Farm also asserts that
Cincinnati’s actions in refusing to arbitrate and in denying the claim based on
the request of their insured is against public policy. Cincinnati has taken a legally permissible
stance in this matter, however, and it is not authorized to defend and
indemnify against the instructions of its insured. Therefore, we conclude there is no violation of public policy.

Attorney
Fees

State Farm argues that the district court erred by denying its request
for attorney fees under the arbitration agreement. It contends that Cincinnati has not
acted in good faith, in violation of the Minnesota Unfair Claims Practices Act. We disagree.

"The construction and
effect of a contract are questions of law for the court.” Turner v. Alpha Phi Sorority House,
276 N.W.2d 63, 66 (Minn. 1979). The parties’
arbitration agreement provides that

[i]n the event that, after removal, the case is
discovered to have been properly placed in arbitration and the Applicant
refiles the case in arbitration, the Respondent must reimburse Applicant for
all reasonable legal expenses and court costs incurred because of the improper
objection to jurisdiction.

Because
Meyer did not tender the defense, and Meyer’s actions did not amount to
noncooperation under the agreement, the dispute does not fall under the
arbitration agreement. Even if it did
fall within the agreement, however, Cincinnati has not made an improper
objection to jurisdiction. We conclude
the district court did not err by determining that State Farm’s request for
attorney fees was unwarranted.

Stay
of Proceedings

State Farm asserts that because this dispute falls
under the parties’ arbitration agreement, the district court erred when it
denied its motion to stay the underlying proceeding between the insureds. We disagree. While a court must stay the proceedings and compel arbitration of
claims subject to arbitration under a valid agreement, Minn. Stat. § 572.09
(2000), no such duty to arbitrate arose here.
Accordingly, the district court did not err by denying State Farm’s
motion to stay the underlying proceeding.

D E C I S I O N

This dispute does not fall within the parties’ intercompany
arbitration agreement because Meyer refused to tender the defense to
Cincinnati. Absent this condition
precedent, Meyer’s actions did not amount to noncooperation under the
agreement, and Cincinnati did not have a duty to arbitrate. The district court, therefore, did not err
by denying State Farm’s motions to compel arbitration, to award attorney fees,
or to stay the underlying proceeding.

Affirmed.

Randall, Judge
(dissenting).

I respectfully dissent.

On the issue of compelling arbitration, I would
require Cincinnati to go to arbitration, award State Farm reasonable attorney
fees for having to bring this matter to court, and remand to the district court
to stay the underlying lawsuit between Michelle Miller and respondent's insured
Glen Meyer.

To me, it is questionable law, and bad public
policy, egregious public policy, not to compel State Farm and Cincinnati to
abide by the terms of their arbitration agreement. Minnesota’s strong public policy of providing for public safety
on our highways, as exemplified by our mandatory insurance law, Minn. Stat. §
65B.48, subd. 1 (2000), is trashed and turned over to the whims and caprice of
each individual insured, in this case, Meyer, who is allowed to blithely state,
“I can give the benefits of my liability coverage to anyone I please and
withhold it from anyone I please, and I am accountable to no one, neither the
law nor the party I have injured.”

I will discuss the arbitration issue first. The two insurance companies, State Farm and
Cincinnati, are both signatories to an inter-company arbitration
agreement. Several insurance companies
belong to the arbitration agreement, the purpose of which is simple and
exemplified by the facts in this case.
State Farm supplies collision insurance to Michelle Miller, who
sustained approximately $2,000 in property damage when Meyer drove into
Miller’s vehicle, which was stopped in his driveway. Miller has a $500 collision deductible. State Farm honored their policy and paid Miller the property
damage minus the deductible, and pursuant to the inter-company arbitration
agreement, served notice on Cincinnati that they wished to arbitrate the matter
of their $1,500 out-of-pocket expense plus Miller’s $500 deductible. Cincinnati refused to arbitrate and blamed
it on their insured Meyer. They said
Meyer had refused to tender the defense to them, had told them in no uncertain
terms that he did not want coverage and would handle the matter on his own and,
therefore, “Gee, our hands are tied; we have to honor our policyholder’s
(Meyer’s) request.” It is worth noting
that the briefs and Cincinnati’s position at oral argument are replete with
manifestations of good faith (obviously to avoid a bad-faith lawsuit). Cincinnati insisted time after time that
there is liability coverage for Meyer and that they are ready, willing, and
able to stand in and do their duty. It
is just that they cannot move “because Mr. Meyer doesn’t want us to.”

The district court and the majority bought
Cincinnati’s argument that “tender” by Meyer is such an integral part of his
liability policy and the inter-company arbitration agreement that everyone’s
hands are tied in this matter until Meyer gives the go-ahead, and he has not
done so yet. I suggest that is bad
law. The automobile-subrogation-arbitration
agreement is in evidence, and all parties agree on its wording. It says in pertinent part that

[s]ignatory companies are bound to forego litigation and in
place thereof submit to arbitration any questions or disputes which may arise
from any automobile physical damage subrogation or property damage claim not in
excess of $100,000.

This
article shall not apply to

any
claim as to which a company asserts a defense of lack of coverage on grounds other
than

(1) delayed notice

(2) no notice

(3) noncooperation[.]

(Emphasis added.) The majority confuses noncooperation, which
is specifically not a bar to arbitration, with the word “tender.” As to noncooperation, Meyer’s actions are
the classic essence of noncooperation.
The record shows that Meyer, from the start, refused to disclose the
identity of the liability insurance company to Miller. That forced Miller to apply to State Farm
under her own collision policy for coverage.
Thus, State Farm and Miller had to sue Meyer for the approximate $2,000
in property damage, meaning State Farm’s payment of approximately $1,500 plus
Miller’s $500 deductible.

Meyer continued to refuse to cooperate in any way
and continued to refuse to notify his insurance company, Cincinnati. When State Farm learned on its own that
Cincinnati provided automobile insurance coverage for Meyer and contacted
Cincinnati to start the arbitration process, Meyer instructed Cincinnati not to
pay the claim, not to cover him, and not to defend him. The record is clear as to Meyer’s stubborn
position. He has such a questionable
driving record that Cincinnati informed him that even on this $2,000
fender-bender, he was in danger of having his insurance with Cincinnati not
renewed. It can be safely assumed that
Meyer would then have to go into the open market and pay even more to get new
insurance coverage (as stated, Minnesota has a mandatory insurance law, which
is a condition precedent to obtain vehicle license plates and to be allowed to
drive legally). Thus, Meyer, to keep
his insurance with Cincinnati (who is complicit in this scheme), arbitrarily
takes the position that he is going to withhold his liability coverage from
Miller and force her to deal with him directly. Meyer is an attorney. The
file reflects that his actions in instructing Cincinnati not to defend him, and
his countersuit against the Millers for his property damage, are delaying
tactics to hopefully wear down Miller and State Farm and get them to settle for
approximately fifty cents on the dollar.
The record reflects an offer by Meyer to settle State Farm’s and
Miller’s claim for fifty percent, meaning $1,000. Meyer has calculated that $1,000 out of his own pocket is less
expensive than not getting renewed by Cincinnati and running the risk of having
to get another insurance company to cover him.

To put it bluntly, Meyer’s pecuniary interests are
not part of the inter-company arbitration agreement to which State Farm and
Cincinnati are signatories. Cincinnati
concedes that Meyer is not. To cover exactly
this type of situation, the inter-company arbitration agreement excludes as a
defense “noncooperation.” As stated,
you could not find a better definition of noncooperation than Meyer’s actions. This entire matter resolves itself simply,
peacefully, and with judicial economy if Cincinnati steps forward and
arbitrates a $2,000 fender-bender.
State Farm stipulated on the record that if Cincinnati goes to
arbitration, it and the Millers will drop their lawsuit in district court for
property damage. That would in no way
prejudice Meyer’s counterclaim for property damage, as that is a stand-alone
issue. He has a right to sue Miller and
see if he can prevail. He does not need
Cincinnati’s permission to sue Miller.
He simply has to take his case into court and proceed.

The issue of “tender” on which the district court
and the majority hang their analysis is not before us. The inter-company arbitration agreement
specifically excludes noncooperation as an issue. In another lawsuit, not ours, it is possible that Cincinnati and
Meyer might have a tender issue. Assume
that Miller had extensive property damage and personal injuries to the point
where Meyer wanted coverage. Assume Meyer's
actions, lack of tender, and other noncooperative actions were egregious. Cincinnati, as any insurance company, would
have the right to go into district court and seek a declaratory judgment that
they had no obligation to defend and indemnify their insured because
“cooperation” with the insurance company is a boilerplate phrase in every
insurance contract written. Obviously,
even a self-interested insurance company has a right to expect its insured to
give it the details of what happened so they are in a position to evaluate
coverage, legal tactics, protect the insured’s interests, and evaluate the
potential claim for loss-reserve purposes.
That is not our case. Between
Cincinnati and Meyer on another set of facts, lack of tender and noncooperation
could be an issue. See, e.g.,
Rieschl v. Travelers Ins. Co., 313 N.W.2d 615 (Minn. 1981) (insurer brought
action seeking to declare that insured breached cooperation clause of
policy). Between State Farm and
Cincinnati, noncooperation is not an issue.
It is written right out of the arbitration agreement and cannot
constitute a bar to arbitration.

Now to the issue of public policy. This refusing-to-tender tactic (entirely at
the whim of the insured) increases the litigation burden on the court system
and results in payments to an injured party taking significantly longer than if
the insurance companies were involved.
This defeats the principles behind the No-Fault Act, including injured
parties receiving prompt payment of benefits and easing the burden of
litigation on courts. See Minn.
Stat. § 65B.42(4) (2000). Notably,
another purpose of the No-Fault Act is

[t]o
create a system of small claims arbitration to decrease the expense of and to
simplify litigation, and to create a system of mandatory intercompany
arbitration to assure a prompt and proper allocation of the costs of insurance
benefits between motor vehicle insurers[.]

Minn. Stat. § 65B.42(4). Meyer is not a signatory to the arbitration agreement. His participation, or lack thereof, does not
affect the agreement between two insurers to arbitrate.

Judicial economy, public policy, and the intent of
mandatory auto insurance require that signatories to the inter-company
auto-insurance arbitration agreement comply with the letter and spirit of their
agreement and the mandatory auto-insurance statute.

Assume that Meyer caused both property damage and
personal injury to Miller or hit a pedestrian walking in the vicinity. Under Cincinnati’s and Meyer’s theory, he
could still “refuse coverage” to save himself money in future auto premiums and
force the injured victims to take their chances on whether any judgment would
be collectible.

It is bizarre to put the issue of who has
insurance in the hands of a driver whose record with his own company is so
questionable that over a routine $2,000 fender-bender with no personal
injuries, the company stands ready not to renew his policy. The majority’s decision permits Meyer to
avoid the problem that he, not Miller, created, simply by snapping his finger
and saying, “I don’t want insurance on this claim!” See Minn. Stat. § 645.17(1) (2000) (stating
legislature does not intend absurd result).
Minnesota’s mandatory auto-insurance law is effectively eliminated if
any driver can opt out whenever he feels it is advantageous to do so.

According to the Minnesota Department of Public
Safety, Office of Traffic Safety, “[a]t the end of the 2001 calendar year,
3,685,499 people held Minnesota driver licenses and 4,376,815 motor vehicles
were registered in the state.”
Minnesota Dep’t of Pub. Safety, Minnesota Motor Vehicle Crash Facts
(2001).

It is beyond comprehension that 3.6 million
different individuals control Minnesota’s mandatory liability-insurance law
without any legislative standards or accountability of any kind! It is egregious public policy to give each
individual driver, after requiring them to carry liability insurance to drive
legally in this state, the power to “vest pocket” their liability insurance;
“bestow” it on those people that they like and in those situations that they
want to; but withhold it from injured victims they do not like in other
situations, as Meyer is doing. Even
Cincinnati concedes that Meyer is doing this to avoid the possibility of them
not renewing his automobile insurance because of his past driving record. I ask one simple question in this
dissent. Is the letter and the spirit
of Minnesota’s mandatory liability-insurance law to protect bad drivers or
injured victims?

I dissent. I
would reverse the ruling of the district court and compel Cincinnati to proceed
to arbitration. I would award State
Farm reasonable attorney fees for having to go to district court and then this
court to compel arbitration. I would
remand to the district court to stay the property-damage lawsuit of State Farm
and Miller against Meyer, and Meyer’s property damage counterclaim against
Miller until State Farm and Cincinnati have finished arbitration. I would instruct the district court to then
allow Meyer to proceed on his counterclaim against the Millers for his property
damage.

This described sequence gives a reasonable
interpretation to not a difficult word, “noncooperation.” It serves the purpose and the public policy
of the inter-company arbitration agreement, serves the strong public policy of
the State of Minnesota as evidenced by the No-Fault Act and the mandatory
insurance law, allows Meyer to proceed on his property-damage claim in a court
of law, and judicial economy and integrity are furthered. Meyer and Cincinnati, as of now, mock both.